Lihir Gold advises suitor to splash more cash

Lihir Gold
has suggested
Newcrest Mining
will need to substantially increase its $9.9 billion offer for the gold producer to get a deal across the line.

“Almost everyone sees the need for a substantial increase in the price for Lihir Gold," Lihir chairman Ross Garnaut said.

“The exceptions of course are those who [are] pretty well equally placed across the two companies, or who own proportionally more of Newcrest than Lihir," he told the ABC’s Inside Business program.

On the same program, Newcrest chief executive
Ian Smith
said the bid was a “full and fair" offer but it would go back to shareholders to get their reaction. He did not say if the bid was final.

A merger between Newcrest and Lihir would create the world’s fourth-largest goldminer and Australia’s 10th-biggest company. Newcrest has offered one of its shares for every nine Lihir shares plus 22.5¢ cash for each Lihir share. The offer is a 31 per cent premium to the average price of Lihir shares in the month leading up to the bid.

Newcrest shares closed at $35.63 on Friday, valuing the Lihir bid at $4.18 a share. Lihir shares closed 3¢ higher at $3.99 and traded at a discount to the proposal all of last week.

Major shareholders, many of whom hold both companies, believe in the strategic benefits of the merger and it may only take a small increase in Newcrest’s bid for the deal to go through.

Mr Smith said on Friday he was willing to be flexible about the structure of the company’s bid, but would not be rushed into raising the offer. Mr Smith and Lihir’s new chief executive,
Graeme Hunt
, spent most of last week talking with investors about Newcrest’s proposal, which was rejected by the Lihir board at the start of the month.

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About 70 per cent of Newcrest’s investors are outside Australia. Mr Garnaut told Inside Business there were a lot of shareholders who supported a deal but they did not think the current price was good enough. Three major institutions – BlackRock, Colonial Asset Management and Fidelity – control roughly 35 per cent of both Lihir and Newcrest and their views will have a major bearing on whether a deal is done.

Pengana Capital portfolio manager Tim Schroeders, who owns Lihir and Newcrest shares, reiterated his belief the bid was fully priced. He said he would not be surprised if terms were adjusted slightly in favour of Lihir in the order of 5-to-10 per cent to get a deal done.

“Something that’s going to produce in the order of 2.9 million ounces, have 200-odd million ounces of resources, sitting in Australia and being accessible for Australian investors is a huge opportunity and that type of company ultimately becomes very attractive to the mega-players in gold," Mr Schroeders said.

Newcrest approved a $1.9 billion expansion of its Cadia operations in NSW on Friday and will start construction immediately of the Cadia East key growth project. It will be the largest underground mine in Australia and employ 1300 people at the peak of construction. The mine will produce between 700,000 and 800,000 ounces of gold and more than 75,000 tonnes of copper a year from 2013.

Investors have tended to attach a premium to miners that derive 70 per cent or more of their revenue from gold production.